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ISLE > SEC Filings for ISLE > Form 10-Q on 29-Aug-2014All Recent SEC Filings

Show all filings for ISLE OF CAPRI CASINOS INC

Form 10-Q for ISLE OF CAPRI CASINOS INC


29-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements that we believe are, or may be considered to be, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this report regarding the prospects of our industry or our prospects, plans, financial position or business strategy, may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as "may," "will," "expect," "intend," "estimate," "foresee," "project," "anticipate," "believe," "plans," "forecasts," "continue" or "could" or the negatives of these terms or variations of them or similar terms. Furthermore, such forward-looking statements may be included in various filings that we make with the SEC or press releases or oral statements made by or with the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct and are not guarantees of future performance. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which reflect management's opinions only as of the date hereof. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any additional disclosures we make in our reports to the SEC. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.

For a more complete description of the risks that may affect our business, see our Annual Report on Form 10-K for the year ended April 27, 2014.

Executive Overview

We are a developer, owner and operator of branded gaming facilities and related dining, lodging and entertainment facilities in regional markets in the United States. We have sought and established geographic diversity to limit the risks caused by weather, regional economic difficulties, gaming tax rates and regulations of local gaming authorities. We currently operate casinos in Colorado, Florida, Iowa, Louisiana, Mississippi, Missouri and Pennsylvania.

Our operating results for the periods presented have been affected, both positively and negatively, by current economic conditions and several other factors discussed in detail below. Our historical operating results may not be indicative of our future results of operations because of these factors and the changing competitive landscape in each of our markets, as well as by factors discussed elsewhere herein. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the year ended April 27, 2014 and by giving consideration to the following:

Items Impacting Income (Loss) from Continuing Operations- Significant items impacting our income (loss) from continuing operations during the fiscal quarters ended July 27, 2014, and July 28, 2013 are as follows:

Corporate Restructuring - During the fiscal quarter ended July 27, 2014, we eliminated certain executive positions in the corporate office to maximize efficiency and streamline reporting lines, resulting in severance expense of $2.3 million.

Colorado Referendum Costs -During the fiscal quarter ended July 27, 2014, the Company incurred $1.0 million of costs in support of efforts to defeat the proposed November referendum that would expand gaming to racetracks in certain counties in Colorado.


Casino Openings - We opened our Lady Luck Casino on the Nemacolin Woodlands Resort in Farmington, Pennsylvania on July 1, 2013.

Disruption -Our Boonville property was affected by power outages and forced to close three times during the three months ended July 28, 2013 for approximately 40 hours, of which two periods were over the key holidays of Father's Day weekend and on the 4th of July. These disruptive events had a negative impact on our fiscal 2014 operating results.

Income Tax Provision - Our income tax provision from continuing operations was impacted by changes in the deferred tax liability attributable to indefinite lived intangibles and expense for state jurisdictions where taxable income is generated without net operating loss carry forwards available. Our tax provision was $1.0 million and $1.4 million for the three months ended July 27, 2014 and July 28, 2013, respectively.

Results of Operations



Revenues and operating expenses for the three months ended July 27, 2014 and
July 28, 2013 are as follows:



                                          Three Months Ended
                                         July 27,    July 28,                 Percentage
(in thousands)                             2014        2013       Variance     Variance
Revenues:
Casino                                  $  255,072   $ 250,834   $    4,238          1.7 %
Rooms                                        8,312       8,915         (603 )       -6.8 %
Food, beverage, pari-mutuel and other       34,123      34,122            1          0.0 %
Gross revenues                             297,507     293,871        3,636          1.2 %
Less promotional allowances                (55,858 )   (55,858 )          -          0.0 %
Net revenues                               241,649     238,013        3,636          1.5 %

Operating expenses:
Casino                                      40,128      40,268         (140 )       -0.3 %
Gaming taxes                                64,467      62,678        1,789          2.9 %
Rooms                                        1,903       1,901            2          0.1 %
Food, beverage, pari-mutuel and other       11,372      10,802          570          5.3 %
Marine and facilities                       14,719      14,619          100          0.7 %
Marketing and administrative                60,361      59,250        1,111          1.9 %
Corporate and development                    9,148       6,698        2,450         36.6 %
Preopening expense                               -       3,898       (3,898 )        N/M
Depreciation and amortization               19,643      19,802         (159 )       -0.8 %
Total operating expenses                $  221,741   $ 219,916        1,825          0.8 %

Casino - Casino revenues increased $4.2 million, or 1.7%, for the three months ended July 27, 2014, as compared to the same period in fiscal 2013. Casino revenues at our Nemacolin property, which opened July 1, 2013, were $10.2 million and $2.5 million for the three months ended July 27, 2014 and July 28, 2013, respectively. Excluding casino revenues at our Nemacolin property, casino revenues decreased $3.5 million, or 1.4%.

Casino operating expenses decreased $0.1 million, or 0.3%, for the three months ended July 27, 2014, as compared to the same period in the prior fiscal year. Excluding casino operating expenses of $1.5 million and $0.7 million at our Nemacolin property for the three months ended July 27, 2014 and July 28, 2013, respectively, casino expenses decreased $1.0 million or 2.5%.

Gaming Taxes - State and local gaming taxes increased $1.8 million, or 2.9%, for the three months ended July 27, 2014, as compared to the same period in the prior fiscal year. Excluding gaming taxes at our Nemacolin property for both periods, gaming taxes decreased $0.9 million, or 1.5%, commensurate with the decrease in casino revenues.


Rooms - Rooms revenue decreased $0.6 million, or 6.8%, for the three months ended July 27, 2014, as compared to the same period in the prior fiscal year due to lower occupancy rates.

Promotional Allowances - Promotional allowances were flat for the three months ended July 27, 2014 as compared to the same period in the prior fiscal year. Excluding promotional expenses at our Nemacolin property for both periods, promotional allowances decreased $2.3 million, or 4.1%, reflecting changes in our marketing programs.

Food, Beverage, Pari-Mutuel and Other - Food, beverage, pari-mutuel revenue was flat for the three months ended July 27, 2014 as compared to the same period in the prior fiscal year. Excluding food and beverage revenue at our Nemacolin property of $0.9 million and $0.3 million for the three months ended July 27, 2014 and July 28, 2013, respectively, food, beverage, pari-mutuel and other revenues decreased $0.6 million, or 1.9%.

Food, beverage, pari-mutuel and other expense increased $0.6 million, or 5.3%, for the three months ended July 27, 2014 as compared to the same period of the prior year. Excluding food and beverage expense of $0.4 million and $0.1 million at our Nemacolin property during the three months ended July 27, 2014 and July 28, 2013, respectively, food, beverage, pari-mutuel and other expense increased $0.3 million, or 3.1%.

Marketing and Administrative - Marketing and administrative expenses increased $1.1 million, or 1.9%, for the three months ended July 27, 2014 as compared to the same period in the prior fiscal year. Excluding marketing and administrative expenses at our Nemacolin property for both periods, as well as the $1.0 million of costs incurred to defeat the Colorado referendum, marketing and administrative expenses decreased $1.9 million, or 1.6%, reflecting changes in our marketing programs as well as savings from cost reduction initiatives.

Corporate and Development - During the three months ended July 27, 2014, our corporate and development expenses were $9.1 million compared to $6.7 million for the three months ended July 28, 2013. The three months ended July 27, 2014 includes severance of $2.3 million resulting from the corporate restructuring. The three months ended July 28, 2013 includes a gain of $1.0 million from the sale of our corporate aircraft. The remaining decrease reflects savings achieved through cost reduction initiatives and the timing of our long-term incentive plan payments.

Other Income (Expense) and Income Taxes



Interest expense, interest income, derivative expense and income tax provision
for the three months ended July 27, 2014 and July 28, 2013 are as follows:



                         Three Months Ended
                        July 27,    July 28,                 Percentage
(in thousands)            2014        2013       Variance     Variance

Interest expense       $  (21,329 ) $ (22,654 ) $    1,325         -5.8 %
Interest income                87          90           (3 )       -3.3 %
Derivative income               -         230         (230 )     -100.0 %
Income tax provision         (983 )    (1,411 )        428        -30.3 %

Interest Expense - Interest expense decreased $1.3 million for the three months ended July 27, 2014, as compared to the same period in the prior fiscal year. This decrease is a result of a decrease in the outstanding borrowings against our revolving credit facility as compared to prior year.


Liquidity and Capital Resources

Cash Flows from Operating Activities - During the three months ended July 27, 2014, we generated $16.6 million in cash flows from operating activities compared to generating $10.9 million during the three months ended July 28, 2013. The year over year increase in cash flows from operating activities is primarily the result of the decrease in operating loss and changes in working capital.

Cash Flows used in Investing Activities - During the three months ended July 27, 2014, we used $8.4 million for investing activities compared to using $26.8 million during the three months ended July 28, 2013. Significant investing activities for the three months ended July 27, 2014 included capital expenditures of $9.0 million offset by the change in restricted cash and investments of $0.6 million. Significant investing activities for the three months ended July 28, 2013 included capital expenditures of $22.3 million, of which $13.8 million related to Nemacolin, as well as an additional $7.5 million toward a Nemacolin gaming license. These outflows were offset by $1.8 million of cash inflows from the change in restricted cash and investments and $1.1 million in proceeds from the sale of property and equipment, primarily the sale of the corporate aircraft.

Cash Flows from Financing Activities - During the three months ended July 27, 2014, our net cash flows used in financing activities were used primarily to repay borrowings under our Credit Facility of $9.7 million. During the three months ended July 28, 2013, our net cash flows provided from financing activities were primarily from $14.9 million in borrowings under our Credit Facility.

Availability of Cash and Additional Capital - At July 27, 2014, we had cash and cash equivalents of $68.3 million and marketable securities of $27.6 million. As of July 27, 2014, we had $55.0 million in outstanding revolving credit borrowings under our Credit Facility and our net line of credit availability was approximately $125.0 million, as limited by our maximum consolidated total leverage ratio covenant.

Capital Expenditures and Development Activities- Historically, as part of our business development activities, we have entered into agreements which have resulted in the acquisition or development of businesses or assets. These business development efforts and related agreements typically require the expenditure of cash, which may be significant. The amount and timing of our cash expenditures relating to development activities may vary based upon our evaluation of current and future development opportunities, our financial condition and the condition of the financing markets. Our development activities are subject to a variety of factors including but not limited to: obtaining permits, licenses and approvals from appropriate regulatory and other agencies, legislative changes and, in certain circumstances, negotiating acceptable leases.

On February 1, 2013, we signed an agreement with Tower Investments, Inc. to manage The Provence, the resort and casino on North Broad Street, Philadelphia, proposed by Tower Entertainment, LLC (the "Tower JV"), if the project is selected by the Pennsylvania Gaming Control Board. The Tower JV is one of four applicants for the final gaming license in Philadelphia. As part of our agreement with the Tower JV, we committed to loan $25 million to the Tower JV for the purpose of securing the Pennsylvania gaming license fee relating to the project. The commitment for the loan is secured by a stand by letter of credit, which can only be drawn upon if the Tower JV is awarded the license. If the Tower JV is selected, we have the option to either 1) be repaid from the proceeds of permanent financing, or 2) convert the $25 million loan into a minority investment in the Tower JV.

Historically, we have made significant investments in property and equipment and expect that our operations will continue to demand ongoing investments to keep our properties competitive. The timing, completion and amount of additional capital projects will be subject to improvement of economic and local market conditions, cash flows from our continuing operations and borrowing availability under our Credit Facility.

Typically, we have funded our daily operations through net cash provided by operating activities and our significant capital expenditures through operating cash flow and debt financing. While we believe that cash on hand, cash flow from operations, and available borrowings under our Credit Facility will be sufficient to support our working capital needs, planned capital expenditures and debt service requirements for the foreseeable future, there is no assurance that these sources will in fact provide adequate funding for our planned and necessary expenditures or that the level of our capital investments will be sufficient to allow us to remain competitive in our existing markets.


We are highly leveraged and may be unable to obtain additional debt or equity financing on acceptable terms if our current sources of liquidity are not sufficient or if we fail to stay in compliance with the covenants of our Credit Facility. We will continue to evaluate our planned capital expenditures at each of our existing locations in light of the operating performance of the facilities at such locations.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles that require our management to make estimates and assumptions that affect reported amounts and related disclosures. Management identifies critical accounting estimates as:

those that require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made;

those estimates where, had we chosen different estimates or assumptions, the resulting differences would have had a material impact on our financial condition, changes in financial condition or results of operations; and

those estimates that, if they were to change from period to period, likely would result in a material impact on our financial condition, changes in financial condition or results of operations.

For a discussion of our significant accounting policies and estimates, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements presented in our 2014 Annual Report on Form 10-K. There were no newly identified significant accounting estimates in the first quarter of fiscal year 2015, nor were there any material changes to the critical accounting policies and estimates set forth in our 2014 Annual Report.

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